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Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF No. 06-11) became effective in the first quarter of 2009.  EITF No. 06-11 requires that the tax benefit received on dividends associated with share-based awards that are charged to retained earnings should be recorded in additional paid-in-capital (APIC) and included in the APIC pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards.  The adoption of EITF No. 06-11 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company must adopt these new requirements in its first quarter of fiscal 2010.  The adoption of this statement will impact the manner in which the Company presents noncontrolling interests, but will not impact its consolidated financial position or results of operations.

 

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ACETO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited and in thousands, except per-share amounts)

 

 

In December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007) “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The provisions for SFAS No. 141R are effective for fiscal years beginning after December 15, 2008 and are applied prospectively to business combinations completed on or after that date.  Early adoption is not permitted. SFAS No. 141R is effective for the Company beginning in the first quarter of fiscal 2010.  The Company is evaluating the impact of SFAS No. 141R on its results of operations and financial condition.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently assessing the impact of SFAS No. 157 on its condensed consolidated financial statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of fiscal 2010.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities— An Amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 became effective in the third quarter of 2009. The adoption of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Staff Position EITF No. 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-06-1). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, “Earnings per Share”. The Company will adopt FSP EITF 03-06-1 effective July 1, 2009. The Company is currently assessing the impact of FSP EITF 03-06-1 on its consolidated financial statements.

(11)  Segment Information

 

The Company's business is organized along product lines into three principal segments: Health Sciences, Chemicals & Colorants and Crop Protection.

 

Health Sciences - includes the active ingredients for generic pharmaceuticals, vitamins, and nutritional supplements, as well as products used in preparing pharmaceuticals, primarily by major innovative drug companies, and biopharmaceuticals.

 

Chemicals & Colorants - includes a variety of specialty chemicals used in plastics, resins, adhesives, coatings, food, flavor additives, fragrances, cosmetics, metal finishing, electronics, air-conditioning systems and many other areas. Dye and pigment intermediates are used in the color-producing industries such as textiles, inks, paper, and coatings. Organic intermediates are used in the production of agrochemicals.

 

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ACETO CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited and in thousands, except per-share amounts)

 

 

Crop Protection - includes herbicides, fungicides and insecticides that control weed growth as well as control the spread of insects and other microorganisms that can severely damage plant growth. The Crop Protection segment also includes a sprout inhibitor for potatoes and an herbicide for sugar cane.

 

The Company's chief operating decision maker evaluates performance of the segments based on net sales and gross profit. The Company does not allocate assets by segment because the chief operating decision maker does not review the assets by segment to assess the segments' performance, as the assets are managed on an entity-wide basis.

Nine Months Ended March 31, 2009 and 2008:

		Health Sciences				Chemicals & Colorants				Crop Protection				Consolidated Totals
2009
Net sales		$	143,863			$	91,236			$	12,755			$	247,854
Gross profit			27,614				13,088				3,235				43,937
2008
Net sales		$	148,522			$	94,036			$	12,330			$	254,888
Gross profit			27,420				13,323				2,342				43,085

Three Months Ended March 31, 2009 and 2008:

		Health Sciences				Chemicals & Colorants				Crop Protection				Consolidated Totals
2009
Net sales		$	44,549			$	29,410			$	5,841			$	79,800
Gross profit			7,071				4,388				1,796				13,255
2008
Net sales		$	58,199			$	35,871			$	4,185			$	98,255
Gross profit			9,963				5,336				744				16,043

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Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Aceto Corporation

We have reviewed the condensed consolidated balance sheet of Aceto Corporation and subsidiaries as of March 31, 2009 and the related condensed consolidated statements of income for the three-month and nine-month periods ended March 31, 2009 and 2008, and the related condensed consolidated statements of cash flows for the nine-month periods ended March 31, 2009 and 2008 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended March 31, 2009.  These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Aceto Corporation and subsidiaries as of June 30, 2008, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated September 4, 2008, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ BDO SEIDMAN, LLP

Melville, New York

May 7, 2009

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q and the information incorporated by reference includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934.  We intend those forward looking-statements to be covered by the safe harbor provisions for forward-looking statements.  All statements regarding our expected financial position and operating results, our business strategy, our financing plans and the outcome of any contingencies are forward-looking statements.  Any such forward-looking statements are based on current expectations, estimates and projections about our industry and our business.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or variations of those words and similar expressions are intended to identify such forward-looking statements.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by any forward-looking statements.  Factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, unforeseen environmental liabilities, international military conflicts, the mix of products sold and their profit margins, order cancellation or a reduction in orders from customers, competitive product offerings and pricing actions, the availability and pricing of key raw materials, dependence on key members of management, continued successful integration of acquisitions, receipt of regulatory approvals, risks of entering into new European markets, and economic and political conditions in the United States and abroad.  We undertake no obligation to update any such forward-looking statements, other than as required by law.

NOTE REGARDING DOLLAR AMOUNTS

In this quarterly report, all dollar amounts are expressed in thousands, except for share prices and per-share amounts.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to provide the readers of our financial statements with a narrative discussion about our business. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.

Executive Summary

Our third quarter and nine month results were impacted by the economic environment that we operate in, which continues to be quite turbulent.  According to a recent Federal Reserve statistical release, in March 2009, domestic manufacturing output decreased 1.7%, and, for the quarter ended March 31, 2009, domestic manufacturing output dropped at an annual rate of 22.5%.

We are reporting net sales of $247,854 for the nine months ended March 31, 2009, which represents a 2.8% decrease from the $254,888 reported in the comparable prior period.  Gross profit for the nine months ended March 31, 2009 was $43,937 and our gross margin was 17.7% as compared to gross profit of $43,085 and gross margin of 16.9% in the comparable prior period.  Our selling, general and administrative costs for the nine months ended March 31, 2009 was relatively flat at $32,921, when compared to $32,924 we reported in the prior period.  Our net income increased to $7,578, or $0.30 per diluted share, compared to $5,496, or $0.22 per diluted share in the prior period.

Our financial position as of March 31, 2009 remains strong, as we had cash and cash equivalents and short-term investments of $39,750, working capital of $130,001, no long-term debt and shareholders’ equity of $139,555.

Our ongoing business is separated into three segments:  Health Sciences, Chemicals & Colorants and Crop Protection.

 

The Health Sciences segment is our largest segment in terms of both sales and gross profits. Products that fall within this segment include active pharmaceutical ingredients (APIs), pharmaceutical intermediates, nutritionals and biopharmaceuticals.

 

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We typically partner with both customers and suppliers years in advance of a drug coming off patent to provide the generic equivalent.  We believe we have a pipeline of new APIs poised to reach commercial levels over the coming years as the patents on existing drugs expire, both in the United States and Europe. In addition, we continue to explore opportunities to provide a second-source option for existing generic drugs with approved abbreviated new drug applications (ANDAs). The opportunities that we are looking for are to supply the APIs for the more mature generic drugs where pricing has stabilized following the dramatic decreases in price that these drugs experienced after coming off patent.  As is the case in the generic industry, the entrance into the market of other generic competition generally has a negative impact on the pricing of the affected products.  According to a Generic Pharmaceutical Association’s, April 2009 press release, generic drug prices decreased by an average of 10.6% during 2008.  By leveraging our worldwide sourcing, quality assurance and regulatory capabilities, we believe we can be an alternative lower cost, second-source provider of existing APIs to generic drug companies.

 

The Chemicals & Colorants segment is a major supplier to the many different industries that require outstanding performance from chemical raw materials and additives.  Products that fall within this segment include intermediates for dyes, pigments and agrochemicals.  We provide chemicals used to make plastics, surface coatings, textiles, lubricants, flavors and fragrances. Many of our raw materials are also used in high-tech products like high-end electronic parts (circuit boards and computer chips) and binders for specialized rocket fuels. We are currently responding to the changing needs of our customers in the color producing industry by taking our resources and knowledge downstream as a supplier of select organic pigments. According to the Federal Reserve statistical release described above, the production index for durable goods contracted at an annual rate of more than 30% for the quarter ended March 31, 2009.

 

The Crop Protection segment sells herbicides, fungicides, insecticides, and other agricultural chemicals to customers, primarily located in the United States and Western Europe. In the fiscal 2009 second quarter, we received our EPA registration for Halosulfuron, a herbicide used to control sedge on rice, vegetables and turf and ornamental grasses.  In our fiscal 2009 third quarter, we began selling Halosulfuron for the current growing season.  In addition, we have three products that we have already filed with the EPA for registrations and several other products in various stages of review.  Our plan is to continue to develop this pipeline and bring to market additional products in a similar manner. In May 2008, we sold an insecticide product to its patent owner in conjunction with litigation settlement involving an expired license.

 

Our main business strengths are sourcing, quality assurance, regulatory support, marketing and distribution. In fiscal 2009, we are developing an industrial brand for Aceto called “Enabling Quality Worldwide” and are marketing this brand globally. With a physical presence in ten countries, we distribute over 1000 pharmaceuticals and chemicals used principally as raw materials in the pharmaceutical, agricultural, color, surface coating/ink and general chemical consuming industries. We believe that we are currently the largest buyer of pharmaceutical and specialty chemicals for export from China, purchasing from over 500 different manufacturers.

In this MD&A section, we explain our general financial condition and results of operations, including the following:

	●	factors that affect our business
	●	our earnings and costs in the periods presented
	●	changes in earnings and costs between periods
	●	sources of earnings
	●	the impact of these factors on our overall financial condition

As you read this MD&A section, refer to the accompanying condensed consolidated statements of income, which present the results of our operations for the three and nine months ended March 31, 2009 and 2008.  We analyze and explain the differences between periods in the specific line items of the condensed consolidated statements of income.

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Critical Accounting Estimates and Policies

As disclosed in our Form 10-K for the year ended June 30, 2008, the discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  In preparing these financial statements, we were required to make estimates and assumptions relating to critical accounting estimates and policies that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We regularly evaluate our estimates including those related to allowances for bad debts, inventories, goodwill and other indefinite-lived intangible assets, long-lived assets, environmental and other contingencies, income taxes and stock-based compensation.  We base our estimates on various factors, including historical experience, advice from outside subject-matter experts, and various assumptions that we believe to be reasonable under the circumstances, which together form the basis for our making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

Since June 30, 2008, there have been no significant changes to the assumptions and estimates related to those critical accounting estimates and policies.

RESULTS OF OPERATIONS

Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008

		Net Sales by Segment Nine months ended March 31,
																		Comparison 2009
		2009								2008								Over/(Under) 2008
						% of								% of								$		%
Segment		Net sales				total				Net sales				total				change				change
Health Sciences		$	143,863				58.0	%		$	148,522				58.3	%		$	(4,659	)			(3.1	%)
Chemicals & Colorants			91,236				36.8				94,036				36.9				(2,800	)			(3.0	)
Crop Protection			12,755				5.2				12,330				4.8				425				3.4
Net sales		$	247,854				100.0	%		$	254,888				100.0	%		$	(7,034	)			(2.8	%)
		Gross Profit by Segment Nine months ended March 31,
																		Comparison 2009
		2009								2008								Over/(Under) 2008
		Gross				% of				Gross				% of								$		%
Segment		Profit				sales				Profit				sales				change				Change
Health Sciences		$	27,614				19.2	%		$	27,420				18.5	%		$	194				0.7	%
Chemicals & Colorants			13,088				14.3				13,323				14.2				(235	)			(1.8	)
Crop Protection			3,235				25.4				2,342				19.0				893				38.1
Gross Profit		$	43,937				17.7	%		$	43,085				16.9	%		$	852				2.0	%

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Net Sales

Net sales decreased $7,034, or 2.8%, to $247,854 for the nine months ended March 31, 2009, compared with $254,888 for the prior period.  We reported sales decreases in our Health Sciences and Chemicals & Colorants segments which were partially offset by a sales increase in our Crop Protection segment, as explained below.

Health Sciences

Net sales for the Health Sciences segment decreased by $4,659 for the nine months ended March 31, 2009, to $143,863, which represents a 3.1% decrease from net sales of $148,522 for the prior period.  This decrease is due to various factors including decreased sales from our foreign operations of $3,811, specifically our European and Singapore operations and a $3,676 decline in sales of domestic pharmaceutical intermediates, which represent key components used in the manufacture of certain drug products. The overall decrease in sales for the Health Sciences segment is offset, in part, by an increase in sales of $3,113 of our domestic nutraceutical products, which represent raw materials used in the production of nutritional supplements.

Chemicals & Colorants

Net sales for the Chemicals & Colorants segment decreased by $2,800 for the nine months ended March 31, 2009, to $91,236, which represents a 3.0% decline from net sales of $94,036 for the prior period.  Our chemical business is diverse in terms of products, customers and consuming markets and is directly impacted by the current economic recession.  The decrease in sales from this segment is attributable to decreased sales of $3,006 in chemicals used in aroma products, a decline of $1,228 in sales of color pigments, and a $1,428 drop in chemicals used to produce surface coatings. These decreases are partially offset by an increase of $1,208 in sales of polymer additives and a $1,180 increase in sales of chemicals utilized in the food, beverage and cosmetic industries.

Crop Protection

Net sales for the Crop Protection segment increased to $12,755 for the nine months ended March 31, 2009, an increase of $425, or 3.4%, from net sales of $12,330 for the prior period.  The increase over the prior period is attributed to the launch of Halosulfuron, a herbicide used to control sedge on rice, vegetables and turf and ornamental grasses and an increase in sales of Asulam, a herbicide used on sugar cane. The increase in Crop Protection sales is partially offset by decreased sales of our sprout inhibitor products, which are utilized on potato crops, as well as an insecticide in which we were involved in an antitrust case related to certain licensed technology.   In May 2008, we sold this insecticide product to its patent owner in conjunction with litigation settlement involving an expired license.

Gross Profit

Gross profit increased $852 to $43,937 (17.7% of net sales) for the nine months ended March 31, 2009, as compared to $43,085 (16.9% of net sales) for the prior period.

Health Sciences

Health Sciences’ gross profit of $27,614 for the nine months ended March 31, 2009 was relatively consistent to the $27,420 of gross profit in the prior period.  Gross profit for the domestic pharmaceutical intermediates declined by $337, offset in part, by an increase of $118 in gross profit in our foreign operations, particular in our Shanghai operations.

Chemicals & Colorants

Gross profit for the nine months ended March 31, 2009 decreased by $235, or 1.8%, over the prior period. The gross margin was up slightly at 14.3% for the nine months ended March 31, 2009 compared to 14.2% for the prior period.  The decrease in the gross profit primarily relates to overall decrease in sales volume as well as unfavorable price mix on sales in our foreign operations.

 

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Crop Protection

Gross profit for the Crop Protection segment increased to $3,235 for the nine months ended March 31, 2009, versus $2,342 for the prior period, an increase of $893 or 38.1%.  This increase primarily relates to Halosulfuron, in which the Company first commenced sales on this product in the third quarter of 2009.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) remained relatively flat at $32,921 for the nine months ended March 31, 2009 compared to $32,924 for the prior period.  As a percentage of sales, SG&A increased to 13.3% for the nine months ended March 31, 2009 versus 12.9% for the prior period. SG&A experienced an increase of $1,101 in personnel related costs, of which $363 relates to our foreign operations and $738 relates to various factors including annual salary increases and stock-based compensation. We also incurred higher bad debt expense of $501 as a result of additional reserves. These increases in SG&A are offset by a decline of $1,488 in legal costs from the prior period for which there is no comparable amount in the current period. These legal costs in the prior period related to an antitrust case that we previously commenced against the owner of certain licensed technology used with one of our crop protection products, which was settled in May 2008.

Research and Development Expenses

Research and development expenses (R&D) decreased $479 over the prior period to $153 for the nine months ended March 31, 2009 due to the abandonment of R&D related to two finished dosage form generic pharmaceutical products that were to be distributed in Europe.

Operating Income

For the nine months ended March 31, 2009, operating income was $10,863 compared to $9,529 in the prior period, an increase of $1,334 or 14.0%.  This increase was due to the overall increase in gross profit of $852 and to a $482 decline in R&D expenses and SG&A

Interest and Other Income, Net

Interest and other income, net was $465 for the nine months ended March 31, 2009, which represents a decrease of $131 over the prior period mainly due to an increase in foreign exchange losses and unrealized losses on trading securities, partly offset by income from a joint venture.

Provision for Income Taxes

The effective tax rate for the nine months ended March 31, 2009 decreased to 32.7% from 45.4% for the prior period.  The decrease in the effective tax rate was primarily due to German tax reform, which was enacted in August 2007, that reduced the German corporate headline tax rate for businesses from 40% to 30%, as well as implementing a cap on interest deductions and tightening the tax basis for trade tax income. This tax rate reduction became effective for tax years ending after January 1, 2008. Due to the future reduction in the overall German tax rate, the deferred income tax asset was revalued during the month of enactment of the tax reform, which was in the first quarter of fiscal 2008, and therefore was reduced by approximately $1,429. The decrease in the effective tax rate from the prior period is partially offset by charges, including an approximate $295 tax charge related to the anticipated repatriation of earnings from certain foreign subsidiaries.  Without these charges, we expect the fiscal 2009 effective tax rate to be 29.0%. At this time, we do not expect any further repatriation of earnings from our foreign subsidiaries.

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Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

		Net Sales by Segment Three months ended March 31,
																		Comparison 2009
		2009								2008								Over/(Under) 2008
						% of								% of								$		%
Segment		Net sales				total				Net sales				total				change				change
Health Sciences		$	44,549				55.8	%		$	58,199				59.2	%		$	(13,650	)			(23.5	%)
Chemicals & Colorants			29,410				36.9				35,871				36.5				(6,461	)			(18.0	)
Crop Protection			5,841				7.3				4,185				4.3				1,656				39.6
Net sales		$	79,800				100.0	%		$	98,255				100.0	%		$	(18,455	)			(18.8	%)
		Gross Profit by Segment Three months ended March 31,
																		Comparison 2009
		2009								2008								Over/(Under) 2008
		Gross				% of				Gross				% of								$		%
Segment		profit				sales				profit				sales				change				change
Health Sciences		$	7,071				15.9	%		$	9,963				17.1	%		$	(2,892	)			(29.0	%)
Chemicals & Colorants			4,388				14.9				5,336				14.9				(948	)			(17.8	)
Crop Protection			1,796				30.7				744				17.8				1,052				141.4
Gross profit		$	13,255				16.6	%		$	16,043				16.3	%		$	(2,788	)			(17.4	%)

Net Sales

Net sales decreased $18,455, or 18.8%, to $79,800 for the three months ended March 31, 2009, compared with $98,255 for the prior period.  We reported sales decreases in our Health Sciences and Chemicals & Colorants segments which were partially offset by a sales increase in our Crop Protection segment, as explained below.

Health Sciences

Net sales for the Health Sciences segment decreased by $13,650 for the three months ended March 31, 2009, to $44,549, which represents a 23.5% decrease from net sales of $58,199 for the prior period.  This decrease is partially due to a decline of $2,338 in sales of our domestic pharmaceutical intermediates. Sales in our domestic generics product group decreased by $3,614, as well as our foreign operations, especially Europe, experienced a drop in sales of $8,218. As previously mentioned, sale prices of generic drugs have decreased on average 10.6% in calendar 2008. In addition, we saw a decline in reorders of existing products. We expect this difficult market to continue into the upcoming months.

Chemicals & Colorants

Net sales for the Chemicals & Colorants segment were $29,410 for the three months ended March 31, 2009, a decrease of $6,461 from net sales of $35,871 for the prior period.  Our chemical business consists of a variety of products, customers and consuming markets, most of which were negatively affected by the difficult economic conditions.  The decrease of 18.0%, over the prior period is consistent with the overall difficult market conditions we are facing. The decrease is partially attributable to a decrease in sales into the surface coatings industry of $3,666 and a decline of $587 in sales of color pigments. Sales of chemicals used in aroma products also decreased by $2,034 due to reduced demand.

 

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Crop Protection

Net sales for the Crop Protection segment increased to $5,841 for the three months ended March 31, 2009, an increase of $1,656, or 39.6%, from net sales of $4,185 for the prior period.  The increase over the prior period is attributed to the launch of Halosulfuron, a herbicide used to control sedge on rice, vegetables and turf and ornamental grasses and an increase in sales of Asulam, a herbicide used on sugar cane. The increase in Crop Protection sales is partially offset by decreased sales of our sprout inhibitor products, related to the overall potato acreage which is down in the United States and Europe, as well as an insecticide in which we were involved in an antitrust case related to certain licensed technology.   In May 2008, we sold this insecticide product to its patent owner in conjunction with litigation settlement involving an expired license.

Gross Profit

Gross profit decreased to $13,255 (16.6% of net sales) for the three months ended March 31, 2009, as compared to $16,043 (16.3% of net sales) for the prior period.

Health Sciences

Gross profit for the three months ended March 31, 2009 decreased by $2,892, or 29.0%, over the prior period. The gross margin declined to 15.9% for the three months ended March 31, 2009 compared to 17.1% for the prior period.  The decrease in gross profit was attributable to the overall decline in sales volume and the decrease in gross margin primarily related to unfavorable product mix on our domestic pharmaceutical intermediates.

Chemicals & Colorants

Chemicals and Colorants’ gross profit of $4,388 for the three months ended March 31, 2009 was $948 or 17.8% lower than the prior period.  The gross margin at 14.9% for the three months ended March 31, 2009 was consistent to the gross margin for the prior period.  The decrease in the gross profit is due to primarily sales volume decline in our domestic operations.

Crop Protection

Gross profit for the Crop Protection segment increased to $1,796 for the three months ended March 31, 2009, versus $744 for the prior period, an increase of $1,052 or 141.4%.  Gross margin for the quarter also increased to 30.7% compared to the prior period gross margin of 17.8%. The increase in the gross profit and gross margin percentage primarily relates to Halosulfuron, in which the Company first commenced sales of this product in the third quarter of 2009.

Selling, General and Administrative Expenses

SG&A decreased $1,102 or 9.5%, to $10,458 for the three months ended March 31, 2009 compared to $11,560 for the prior period.  As a percentage of sales, SG&A increased to 13.1% for the three months ended March 31, 2009 versus 11.8% for the prior period. The decrease in SG&A relates primarily to a decline of $614 in personnel related costs due primarily to decreased accrued bonus expense as a result of decreased profitability. SG&A also decreased due to a $262 drop in sales and marketing expenses, which is directly related to the decline in sales for the third quarter.

 

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Research and Development Expenses

R&D decreased $279 over the prior period for the three months ended March 31, 2009 due to the abandonment of R&D related to two finished dosage form generic pharmaceutical products that were to be distributed in Europe.

Operating Income

For the three months ended March 31, 2009, operating income was $2,797 compared to $4,204 in the prior period, a decrease of $1,407 or 33.5%.  This decrease was due to the overall decrease in gross profit of $2,788 offset by the $1,102 decrease in SG&A and $279 decline in R&D expenses.

 

Interest and Other (Expense) Income, Net

Interest and other (expense) income, net was ($263) for the three months ended March 31, 2009, which represents an increase of $873 in expense over the $610 of income in the prior period mainly due to an increase in foreign exchange losses, partly offset by income from a joint venture.

Provision for Income Taxes

The effective tax rate for the three months ended March 31, 2009 decreased to 23.5%, from 31.1% for the prior period.  The decrease in the effective tax rate was primarily due to decreased earnings in domestic tax jurisdictions with higher tax rates.

Liquidity and Capital Resources

Cash Flows

At March 31, 2009, we had $39,263 in cash and cash equivalents, of which $31,255 was outside the United States, $487 in short-term investments and no outstanding bank loans.  Working capital was $130,001 at March 31, 2009 versus $128,786 at June 30, 2008.  The $31,255 of cash held outside of the United States is fully accessible to meet any liquidity needs of the countries in which Aceto operates. The majority of the cash located outside of the United States is held by our European operations and can be transferred into the United States. Although these amounts are fully accessible, transferring these amounts into the United States or any other countries could have certain tax consequences. A deferred tax liability will be recognized when we expect that we will recover undistributed earnings of our foreign subsidiaries in a taxable manner, such as through receipt of dividends or sale of the investments. A portion of our cash is held in operating accounts that are with third party financial institutions. These balances exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.

 

Our cash position at March 31, 2009 decreased $7,252 from the amount at June 30, 2008.  Operating activities for the nine months ended March 31, 2009 used cash of $579, for this period, as compared to cash provided by operations of $167 for the comparable 2008 period. The $579 was comprised of $7,578 in net income and $4,178 derived from adjustments for non-cash items less a net $12,335 decrease from changes in operating assets and liabilities. The non-cash items included $1,258 in depreciation and amortization expense, $1,174 in non-cash stock compensation expense, $520 for the provision for doubtful accounts and $972 for the deferred income taxes provision. Trade accounts receivable decreased $5,137 during the nine months ended March 31, 2009, due to decreased sales during the third quarter of 2009 as compared to the fourth quarter of 2008, as well as an improvement in days sales outstanding. Inventories and accounts payable decreased by approximately $4,499 and $16,534, respectively, due primarily to a reduction of inventories in both our domestic Health Sciences and Chemicals and Colorants segments as a result of the Company carrying less inventory due to the current market conditions of the economy. In addition, the Company carried more stock as of June 30, 2008 for certain products of both the Chemicals and Colorants and Health Sciences segments that were purchased from China, due to a supplier interruption related to the Olympics that were held in China in August of 2008. Some of this additional stock did not ship until the first and second quarters of 2009.  Accrued expenses and other liabilities decreased $880 during the nine months ended March 31, 2009, due primarily to a decrease in accrued compensation and a decline in accrued income tax payable, due to the timing of income tax payments partially offset by an increase in accrued expenses related to an increase in Value Added Tax (VAT) for our foreign subsidiaries. Other receivables increased $3,884 due to an increase in VAT taxes receivables in our European subsidiaries and increased royalty receivables on certain Crop Protection products.   We do not anticipate any significant impact on our liquidity and capital resources to fund ongoing operating expenditures and the continuation of semi-annual cash dividends for the next twelve months due to the decline in our cash position. Our cash position at March 31, 2008 decreased $81 from the amount at June 30, 2007.  Operating activities for the nine months ended March 31, 2008 provided cash of $167, for this period, as compared to cash provided by operations of $2,629 for the comparable 2007 period. The $167 was comprised of $5,496 in net income and $4,003 derived from adjustments for non-cash items offset by a net $9,332 decrease from changes in operating assets and liabilities.

 

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Investing activities for the nine months ended March 31, 2009 used cash of $594 primarily related to purchases and maturities of investments.  Investing activities for the nine months ended March 31, 2008 provided cash of $548 primarily related to maturities and sales of available for sale investments offset by the purchases of property and equipment.

Financing activities for the nine months ended March 31, 2009 used cash of $1,795 primarily from the payment of $2,476 of dividends and a $500 payment of a note payable partly offset by proceeds from the exercise of stock options of $1,020. Financing activities for the nine months ended March 31, 2008 used cash of $3,602 primarily from the payments of dividends of $3,665.

On May 7, 2009, the Company's board of directors declared a semi-annual cash dividend of $0.10 per share to be distributed on June 26, 2009 to shareholders of record as of June 15, 2009.

Credit Facilities

We have available credit facilities with certain foreign financial institutions.  These facilities provide us with a line of credit of $19,120, as of March 31, 2009.  We are not subject to any financial covenants under these arrangements.

In June 2007, we amended our revolving credit agreement with a financial institution that expires June 30, 2010, and provides for available credit of $10,000.  At March 31, 2009, we had utilized $13 in letters of credit leaving $9,987 of this facility unused.  Under the credit agreement, we may obtain credit through direct borrowings and letters of credit.  Our obligations under the credit agreement are guaranteed by certain of our subsidiaries and are secured by 65% of the capital of certain of our non-domestic subsidiaries.  There is no borrowing base on the credit agreement.  Interest under the credit agreement is at LIBOR plus 1.50%.  The credit agreement contains several covenants requiring, among other things, minimum levels of debt service and tangible net worth.  We are also subject to certain restrictive debt covenants, including covenants governing liens, limitations on indebtedness, guarantees, sale of assets, sales of receivables, and loans and investments.  We were in compliance with all covenants at March 31, 2009.

Working Capital Outlook

Working capital was $130,001 at March 31, 2009 versus $128,786 at June 30, 2008.  The increase in working capital was primarily attributable to cash derived from net income and reduction of trade receivables and inventories during the nine months.  We continually evaluate possible acquisitions of or investments in businesses that are complementary to our own, and such transactions may require the use of cash.   In connection with our Health Sciences business, we plan to advance a supplier $2,000 in the fourth quarter of fiscal 2009.  In connection with our crop protection business, we plan to acquire product registrations and related data filed with the United States Environmental Protection Agency as well as payments to various task force groups, which could approximate $9,700 over the next five quarters.    In the fourth quarter of fiscal 2009, we plan to repatriate approximately $6,000 of earnings from certain foreign subsidiaries to help finance these crop protection products.  We believe that our cash, other liquid assets, operating cash flows, borrowing capacity and access to the equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures and the anticipated continuation of semi-annual cash dividends for the next twelve months.  We are currently looking into obtaining additional credit facilities to enhance our liquidity.

 

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Impact of New Accounting Pronouncements

 

The Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) on July 1, 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. The adoption of SFAS No. 157 did not have any impact on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 allows companies the choice to measure financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not elect to adopt the fair value option under SFAS 159 for its existing instruments.

Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF No. 06-11) became effective in the first quarter of 2009.  EITF No. 06-11 requires that the tax benefit received on dividends associated with share-based awards that are charged to retained earnings should be recorded in additional paid-in-capital (APIC) and included in the APIC pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards.  The adoption of EITF No. 06-11 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No 51” (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, changes in a parent’s ownership of a noncontrolling interest, calculation and disclosure of the consolidated net income attributable to the parent and the noncontrolling interest, changes in a parent’s ownership interest while the parent retains its controlling financial interest and fair value measurement of any retained noncontrolling equity investment. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company must adopt these new requirements in its first quarter of fiscal 2010.  The adoption of this statement will impact the manner in which the Company presents noncontrolling interests, but will not impact its consolidated financial position or results of operations.

In December 2007, the FASB approved the issuance of SFAS No. 141 (revised 2007) “Business Combinations” (SFAS No. 141R). SFAS No. 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The provisions for SFAS No. 141R are effective for fiscal years beginning after December 15, 2008 and are applied prospectively to business combinations completed on or after that date.  Early adoption is not permitted. SFAS No. 141R is effective for the Company beginning in the first quarter of fiscal 2010.  The Company is evaluating the impact of SFAS No. 141R on its results of operations and financial condition.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of SFAS No.157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently assessing the impact of SFAS No. 157 on its condensed consolidated financial statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of fiscal 2010.

 

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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities— An Amendment of FASB Statement No. 133” (SFAS No. 161). SFAS No. 161 requires enhanced qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 became effective in the third quarter of 2009. The adoption of SFAS No. 161 did not have a material impact on the Company’s consolidated financial statements.

In June 2008, the FASB issued Staff Position EITF No. 03-06-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-06-1). FSP EITF 03-06-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method in SFAS No. 128, “Earnings per Share”. The Company will adopt FSP EITF 03-06-1 effective July 1, 2009. The Company is currently assessing the impact of FSP EITF 03-06-1 on its consolidated financial statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market Risk Sensitive Instruments

The market risk inherent in our market-risk-sensitive instruments and positions is the potential loss arising from adverse changes in investment market prices, foreign currency exchange-rates and interest rates.

Investment Market Price Risk

We had short-term investments of $487 at March 31, 2009.  Those short-term investments consisted of time deposits and corporate equity securities.  Time deposits are short-term in nature and are accordingly valued at cost plus accrued interest, which approximates fair value. Corporate equity securities are recorded at fair value and have exposure to price risk.  If this risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices quoted by stock exchanges, the effect of that risk would be $29 as of March 31, 2009.  Actual results, however, may differ.

Foreign Currency Exchange Risk

In order to reduce the risk of foreign currency exchange rate fluctuations, we hedge some of our transactions denominated in a currency other than the functional currencies applicable to each of our various entities.  The instruments used for hedging are short-term foreign currency contracts (futures).  The changes in market value of such contracts have a high correlation to price changes in the currency of the related hedged transactions.  At March 31, 2009, we had foreign currency contracts outstanding that had a notional amount of $33,049.  The difference between the fair market value of the foreign currency contracts and the related commitments at inception and the fair market value of the contracts and the related commitments at March 31, 2009, was not material.

We are subject to risk from changes in foreign exchange rates for our subsidiaries that use a foreign currency as their functional currency and are translated into U.S. dollars.  These changes result in cumulative translation adjustments, which are included in accumulated other comprehensive income.  On March 31, 2009, we had translation exposure to various foreign currencies, with the most significant being the Euro and the Chinese Renminbi.  The potential loss as of March 31, 2009, resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounted to $7,479.  Actual results, however, may differ.

Interest rate risk

Due to our financing, investing and cash-management activities, we are subject to market risk from exposure to changes in interest rates.  We utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposure to changes in interest rates.  Our financial instrument holdings were analyzed to determine their sensitivity to interest rate changes.  In this sensitivity analysis, we used the same change in interest rate for all maturities.  All other factors were held constant.  If there were an adverse change in interest rates of 10%, the expected effect on net income related to our financial instruments would be immaterial.  However, there can be no assurances that interest rates will not significantly affect our results of operations.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of March 31, 2009 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed under Part I – “Item 1A. Risk Factors” in our Form 10-K for the year ended June 30, 2008 which could materially adversely affect our business, financial condition, operating results and cash flows.  The risks and uncertainties described in our Form 10-K for the year ended June 30, 2008 are not the only ones we face.  Additionally, risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition, operating results or cash flows.

 

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Item 6. Exhibits

The exhibits filed as part of this report are listed below.

	15.1	Awareness letter from independent registered public accounting firm
	31.1	Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	ACETO CORPORATION
DATE  May 8, 2009	BY /s/ Douglas Roth
	Douglas Roth, Chief Financial Officer
	(Principal Financial Officer)
DATE  May 8, 2009	BY /s/ Leonard S. Schwartz
	Leonard S. Schwartz, Chairman
	and Chief Executive Officer
	(Principal Executive Officer)